Saturday, April 14, 2018

Economic Growth In Post-Soviet Estonia Is Nothing Short of Amazing

We have an interest in Eastern Europe, some links below.
From Intellectual Takeout, March 19:

Why Estonia—Yes, Estonia—Is Suddenly One of the Wealthiest Countries in Eastern Europe (and the Most Innovative) 
Estonia is the living example that human progress is closely linked to economic freedom.
The question on why some countries are rich and prosperous whereas others seem to be condemned to the scourge of poverty has been around for centuries. Many factors have been argued to be the determinants of prosperity: geographical, cultural, historical, etc. 

Yet, since at least the publication in 1776 of The Wealth of Nations, we know that political and economic institutions play a decisive role in this respect. Free trade, a reliable legal framework that protects private property and enforces contracts or sound money are necessary conditions for countries to thrive.

The emergence and consolidation of growth-boosting institutions took hundreds of years in countries like the UK and the US. However, in recent decades we have seen that the right policies can significantly speed up economic development.
Estonia is a paradigmatic example of this.

On Aug. 20, 1991, Estonia gained its independence after 51 years under the yoke of communism. The country was first occupied by the Red Army in June 1940 under the umbrella of the German-Soviet Non-Aggression Pact, whereby the two totalitarian states divided Eastern Europe into spheres of influence. One year later, the Nazi Army invaded the Soviet Union, occupying Estonia until 1944, when the Soviets retook the country. The political instability in the Soviet Union during the early 90s precipitated the restoration of democracy in the Baltic country.

From day one, the new government committed to undertaking market-oriented reforms that laid the foundations for a successful transition from socialism to capitalism. The political agenda included monetary reform, the creation of a free-trade zone, a balanced budget, the privatization of state-owned companies, and the introduction of a flat-rate income tax.

One of the architects of this pro-market agenda was Mart Laar, Estonia’s Prime Minister during two periods: 1992-1994 and 1999-2002. Laar has claimed that he took inspiration from Milton Friedman’s bestseller Free to Choose in order to implement his ambitious free-market reform plan.

These reforms paved way for the incredible rise in living standards that Estonia has experienced since independence. Today, Estonia is considered a high-income country by the World Bank, and it is member of the EU and the Eurozone. The purchasing power of Estonians has increased 400 percent over the last two decades despite the severe impact the 2008 financial crisis had on the Baltic economies. In addition, life expectancy has moved from 66 years in 1994 to 77 years in 2016.
Estonia is ranked among the top countries in terms of economic freedom. Government finances are healthy as shown by the fact that public debt is only 9.5% of GDP.  In terms of the labor market, Estonia’s unemployment rate is 5.3%, well below the EU average. Finally, its efficient and attractive corporate tax system (undistributed profits aren’t taxed) has placed Estonia as a worldwide center for high-tech companies, boosting foreign investments and economic growth....

Some of our prior posts on Estonia and its neighbors to the east and south, in no particular order:
...Estonia is the bit of land just north of Latvia, with Russia immediately east.
Just as interesting geopolitically, at least as far as Poles and Lithuanians are concerned, is the tiny bit of Russia centered on the city of Kaliningrad.
Kind of reminds one of Hitler and the Danzig Corridor, as it was then known, now Gdansk.